{"id":100619,"date":"2025-10-27T14:01:16","date_gmt":"2025-10-27T14:01:16","guid":{"rendered":"https:\/\/www.newsbeep.com\/il\/100619\/"},"modified":"2025-10-27T14:01:16","modified_gmt":"2025-10-27T14:01:16","slug":"which-should-come-first-when-investing-for-retirement-total-return-or-income-generation","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/il\/100619\/","title":{"rendered":"Which Should Come First When Investing for Retirement: Total Return or Income Generation?"},"content":{"rendered":"

The standard recommendation for investing for retirement is a straightforward one: Invest 10% (or more!) of your annual income, preferably via a tax-deferred account such as a 401(k) plan with an employer match, and allocate those dollars to an age-appropriate mix of low-cost stock funds, bond funds, and cash, which is relatively easy to do via target-date funds. Do this for 25 or 30 years and the resulting nest egg will likely be large enough, along with Social Security benefits, to support your retirement income needs via a 4% withdrawal rate or whatever rate is deemed prudent<\/a> at that point.<\/p>\n

But there appears to be a growing number of investors who, from the very start, are focused on creating income-producing portfolios. That is, their primary goal is the ongoing acquisition of dividend-paying stocks, mutual funds, or exchange-traded funds. For such investors, the primary measure of success isn\u2019t the total return or balance of their portfolios, it\u2019s the size of the income stream that these dividend-paying assets produce.<\/p>\n

Why It\u2019s Appealing<\/p>\n

One obvious appeal of this approach is that the growing income stream isn\u2019t a hypothetical one, based on an unknown withdrawal rate that will commence decades from now, from an unknown future portfolio balance. Instead, monthly or quarterly dividends are deposited in your brokerage account, which feels \u201creal\u201d in a way that a calculated future withdrawal rate doesn\u2019t. Such income-focused investors can immediately compare their annual investment income with their living expenses, seeing which ones they can already cover from it\u2014a cellphone bill, a car payment, and so on\u2014and then calculate how much more income they\u2019ll need to achieve financial independence.<\/p>\n

Focusing primarily on your portfolio\u2019s income stream can also make market volatility seem less scary. When the US equity market plummeted following the April 2 tariff announcements, anyone doing the math for a \u201c4% of my 401(k) balance\u201d annual withdrawal rate immediately felt the pain, as a 12% drop in their portfolio balance also meant a 12% decrease in the dollars they\u2019d receive via a 4% withdrawal rate. Whereas the income-focused crowd could point to their seemingly unchanged income streams and feel less worried, even if their portfolio balances had declined by similar percentages.<\/p>\n

Finally\u2014and I can only point to anecdotal evidence of this\u2014there may be a virtuous circle element to this approach. That is, it appears that some income-focused investors are investing at higher rates than they otherwise would, as their current income streams inspire them to purchase additional shares to increase that income stream. If you go to X.com or certain subreddits and search for the ticker symbols of some of the more-popular dividend ETFs, you\u2019ll likely see scores of posts and comments from investors touting the number of additional shares they\u2019ve added to their accounts that day.<\/p>\n

This isn\u2019t proof of anything, of course, and it\u2019s limited to the subset of investors who post about such things online. But I have yet to see similar public announcements from investors touting the additional shares they\u2019ve purchased for a target-date mutual fund.<\/p>\n

So What\u2019s the Downside?<\/p>\n

I\u2019m a fan of dividend-based investment strategies (after all, I edit Morningstar\u2019s DividendInvestor newsletter!), but the downside of focusing exclusively on dividends is that they\u2019re only one part of the total return equation, and chasing yield can result in some less-than-ideal security selection decisions. Giving up a portion of your portfolio\u2019s potential total return in exchange for higher current income may be a reasonable trade-off for some investors, but it should be an informed decision. I\u2019ll discuss some of the drawbacks of the \u201cincome first\u201d strategy in an upcoming sequel to this article.<\/p>\n","protected":false},"excerpt":{"rendered":"The standard recommendation for investing for retirement is a straightforward one: Invest 10% (or more!) of your annual…\n","protected":false},"author":2,"featured_media":100620,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[14],"tags":[114,268,85,46,266,267],"class_list":["post-100619","post","type-post","status-publish","format-standard","has-post-thumbnail","category-personal-finance","tag-business","tag-finance","tag-il","tag-israel","tag-personal-finance","tag-personalfinance"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts\/100619","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/comments?post=100619"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/posts\/100619\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/media\/100620"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/media?parent=100619"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/categories?post=100619"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/il\/wp-json\/wp\/v2\/tags?post=100619"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}